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Monthly Archives: July 2013

Americans borrowed in May at the fastest pace in a year, an increase that typically means consumers are feeling more confident. Borrowing in the category that includes credit cards reached its highest point since the fall of 2010.

The New York Times

Americans stepped up their borrowing by $19.6 billion in May compared with April, the Federal Reserve said on Monday in its monthly report on consumer credit. That was the biggest jump since a $19.9 billion rise in May 2012.

Total borrowing reached a record $2.84 trillion.

The category that includes credit card use rose $6.6 billion, also the largest gain in a year. Credit card debt reached $847.1 billion, the most since September 2010. Credit card debt remains about 16 percent below its high of $1.02 trillion in July 2008 — just before the financial crisis erupted.

Borrowing for autos and student loans rose $13 billion in May. That was the sharpest increase since February. This category of borrowing has been rising especially fast, driven by loans to pay for college.

The Fed’s consumer credit report does not separate student loans from auto loans. But data from the Federal Reserve Bank of New York shows that student loan debt has been the biggest driver of borrowing since the recession officially ended. In part, that is because some unemployed Americans have returned to school for training in hopes of landing a job.

Despite the increase in credit card debt in May, consumers are not likely to raise their card use to prerecession levels, said Cooper Howes, an economist at Barclays Research. “We expect the trends of student loan-driven expansion,” Mr. Howes said, “and only small changes in revolving credit to continue in coming months.”

The measure of credit card debt in the Fed’s report has risen $15.8 billion this year. That compares with annual increases from $25 billion to $50 billion in credit card debt before the recession, which officially began in December 2007 and ended in June 2009.

Consumers increased their spending from January through March but reduced the pace of their savings to finance it. After-tax income dropped in the first quarter.

That’s the implication of new data out Monday afternoon that shows that consumer credit — credit cards, auto loans, student loans, basically every form of debt other than mortgages — is rising by leaps and bounds. According to the Federal Reserve’s monthly report, consumer debt rose $19.6 billion in May, an 8.3 percent annual rate. If that rate of increase were sustained it would mean there’d be an extra $235 billion in consumer credit outstanding a year from now. That would amount to more than $2,000 per household.

In billions of dollars. Source: Federal Reserve

This particular data series is jumpy, and there are broader and more reliable measures of consumer debt (particularly those that include mortgages), such as these quarterly numbers prepared by the New York Fed. But even if the May consumer credit numbers overstate the pace at which Americans are escalating their borrowing, it fits with other data suggesting that the post-crisis period of de-leveraging — of paying down debts — has ended.

Here’s the glass-half-full way of looking at this: Americans are finally feeling more confident about the economy and thus willing to take on debt. Lenders, meanwhile, are growing more comfortable extending loans. The spending enabled by this rising consumer debt can help create a virtuous cycle in which more demand for goods and services creates more jobs, which creates rising income. Indeed, more borrowing by households (and the spending that results) is likely offsetting some of the pain caused by federal spending cuts and deficit reduction.

But anyone who lived through the financial crisis and recession, in which excessive household debt was a major contributing factor, has to feel a little squeamish about how quickly consumer credit is rising. As the chart below shows, after falling from mid-2008 to late 2010, consumer credit has been on something of a tear. The $2.84 trillion level in May is a new record in non-inflation-adjusted terms. And credit outstanding is already back up to 2006 levels as a percentage of GDP (though because interest rates are lower, the cost of servicing that debt is quite a bit lower).

Source: Federal Reserve, BEA

There’s nothing to panic about yet. Debt-to-income ratios are quite low, and it may be sensible for people to take advantage of very low interest rates to buy a car or some new furniture. Indeed, that’s the very goal of the Fed’s low-rate policies. As Michael Feroli of JPMorgan notes, “Over the last year total consumer credit outstanding has grown at around a 5.5%-6.0% rate, about the same pace as the growth of nominal consumer spending on durable goods — the type of consumer purchase liable to be financed — and so in that sense the recent expansion of consumer credit is about what might be expected in a normal credit supply environment.”

At the same time, these numbers are worth keeping an eye on. If we finally achieve the long-sought economic recovery, but do so on the backs of an unsustainable run-up in household debt, it will be a pyrrhic victory indeed.

The federal and state governments are incorporating FTC Act (Section-5), FTC telemarketing sales rules and Uniform Debt Management Services Act into their legislation. With the implementation of these new laws, it will be improper and unlawful for ordinary professionals to identify themselves as debt arbitrators. Therefore, it has become very important for them to get certified by recognized and acclaimed organization that provides IAPDA training programs. This training program will make a professional much more informed about the debt relief industry. It will also hone their skill of negotiation and give recognition as a consumer debt specialist.

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The recent changes in bankruptcy filing law have made it difficult for people to turn to bankruptcy, whenever they please, to clear off their debt. The dropping value at housing market has made the residential real estate ‘equity poor’, reducing the amount of available cash for the property owner. The total of American consumer debt is estimated to be $2.56 trillion with 181 million Americans holding approximately 1.5 million credit cards. It has been founded out that approximately each household in the United State is carrying nine credit cards on the average. The scenario indicates the growing demand of debt relief programs that people need to depend upon in order to release their debt. Therefore, the government is taking initiatives to address the challenge by producing a breed of Certified Debt Specialists or Certified Credit Counseling Specialists. It could be the most lucrative opportunity for individuals who want to nail their career on this debt relief services.